Oil plays of the day

What's Mystery in Indiana?

Gas prices were breaking and the Brent crude was getting back in line with the WTI as the United States was starting to move out oil through the reversal of the Seaway pipeline and the WTI was on its way to getting back to global dominance. Yet a sharp jump in gasoline demand this week and a report question North Sea output put the petro's in rally mode!

Reuter's news reported that oil production from the Great Ekofisk area in the North Sea could be reduced by up to 5 million barrels in June due to a shutdown of the Norpipe gas pipeline, industry sources said on Thursday."Ekofisk has to shut down all production, including oil, if they cannot evacuate gas via Norpipe," a source familiar with Norway's offshore oil and gas infrastructure said. "This also affects other fields delivering gas to Norpipe in the area," he added. Gas to Norpipe is fed from the ConocoPhillips-operated COP.N Ekofisk, Eldfisk, Tor and Embla fields, as well as from BP's BP.L Valhall and Hod, and Talisman's TLM.TO Gyda, according to the data from Point Carbon, a Thomson Reuters company. Production from the seven fields in February totalled 5 million barrels of oil. Hod field has not produced any gas or oil since the beginning of this year.

At the same time the risk premium is coming back. Reuter's reports " The White House said on Thursday that the Syrian government of President Bashar al-Assad has probably used chemical weapons on a small scale in the country's civil war, but insisted that President Barack Obama needed definitive proof before he would take action”.

The disclosure created a quandary for Obama, who has set the use of chemical weapons as a "red line" that Assad must not cross, and triggered calls from some hawkish Washington lawmakers for a U.S. military response, which the president has resisted. In a shift from a White House assessment just days earlier, U.S. officials said the intelligence community believed with "varying degrees of confidence" that the chemical nerve agent sarin was used by Assad's forces against rebel fighters. However, it noted that "the chain of custody is not clear."

While Obama has declared that the deployment of chemical weapons would be a game-changer and has threatened unspecified consequences if it happened, his administration will move carefully - mindful of the lessons of the start of the Iraq war more than a decade ago. Then, President George W. Bush's administration used inaccurate U.S. intelligence to justify the invasion of Iraq in pursuit of nuclear, chemical and biological weapons that turned out not to exist”.

Oil has the risk premium back in as the Obama administration may backed into a corner. Stay tuned.

Gas demand in the U.S. may be rocketing back. After the Energy Information Administration reported that U.S. implied gasoline demand increased by 4.4%, which Dow Jones said was the biggest increase in demand since the Thanksgiving increase last year and seemed to suggest that we may have bottomed out, it leads us to ask about the Mystery in Indiana. Well, guess Indiana is always kind of a mystery.

A report from Reuters that Genscape, the pipeline monitoring service, saw increased flows on the BP1 pipeline and reported increased activity at Blake pumping station Led to speculation that the BP refinery in Whiting, Ind. may be ramping up production and an early finish to their major crude unit project that has kept Midwest gasoline prices high. Yet BP is denying the speculation. According to Reuter's BP.L on Wednesday quashed market speculation that it may be preparing to restart the main crude unit at its 405,000 barrel per day (bpd) Whiting refinery after a major overhaul that is not due to be finished for months. "As we stated at our annual general meeting this month, the major upgrade of our Whiting refinery is on track to start up in the second half of the year," a BP spokesman said.

Of course where there are increased flows there is fire. Ok maybe that did not come out right. Maybe when there is smoke there is oil. Ok we will have to watch this story and see if indeed the pipeline remains at these higher rates or not. Natural Gas injection came in at the low end of expectations giving Nat gas a slightly higher close despite the downward pressure from the long crude short Natural gas safe haven play.

Goldman Sachs said that for the past five years it was long gold and short natural gas, it reversed that. And while they took profits on their short gold it thought that natural gas is a safe harbor during times of stress.

The play "'risk on” is normally long crude/short gas or "risk-off” short crude/long gas. Of course we will have to go back and really see how this correlation works and it may not be clear because it seems to work best when the fear factor is running at a high level. Yet with spreads sometimes the correlation is not clear and perhaps there are the other fundamentals that at times overshadow the clarity of this safe haven play. And if that is the case is the safe haven label a fair one to describe the natural gas.

So as we go forward we are going to try to keep an eye on and report the possible added fundamental and try to determine if indeed that natural gas market is being influenced née some degree by economic safe haven mood shifts. Is this indeed a place to park money in times of stress? Will it give you a better return than say bonds and have less volatility than gold? I also encourage comment by readers as to whether or not this is coming into play.

Big picture: we do know that the natural gas story is a natural in the context of the infinite commodity cycle. We know that demand should rise in coming years. We know that there is increasing pressure on the U.S. to export our cheap gas. We know that the increased use of gas has led to plunging co2 levels in the atmosphere.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.